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Moody's affirms Pakistan's B3 rating, maintains stable outlook
Date: Thursday, July 13, 2017
The Moody's Investors Service
(Moody's) Wednesday affirmed the government of Pakistan's B3 issuer
and senior unsecured ratings, and maintained a stable outlook.
According to Moody's credit analysis, Pakistan's medium-term
growth outlook is strong, supported by the China-Pakistan Economic
Corridor (CPEC) project to address critical infrastructure
constraints, and the continuing effects of macro-stability-enhancing
reforms started under the International Monetary Fund (IMF)'s
Extended Fund Facility (EFF) programme in 2013-16.
However, it added that the government's debt burden was high
and fiscal deficits remain relatively wide, driven by a narrow
revenue base that also restricts development spending.
In addition, foreign exchange reserve adequacy, albeit
stronger than a few years ago, would still be vulnerable to any
significant increase in imports.
Domestic politics and geo-political risk also continue to
represent a significant constraint on the rating.
The decision to maintain the stable outlook on Pakistan's B3
rating reflects broadly balanced risks related to these two sets of
factors, it added.
Concurrently, Moody's has affirmed the B3 foreign currency
senior unsecured ratings for The Second Pakistan Int'l Sukuk Co. Ltd
and the Third Pakistan International Sukuk Co Ltd.
Pakistan's Ba3 local currency bond and deposit ceilings remain
unchanged. The B2 foreign currency bond ceiling and the Caa1 foreign
currency deposit ceiling are also unchanged.
These ceilings act as a cap on the ratings that can be
assigned to the obligations of other entities domiciled in the
country.
It says that the outlook for growth has strengthened as a
result of increased macroeconomic stability due to reforms started
during the three-year IMF EFF program and following the launch of
the CPEC project in 2015.
In the fiscal year ended June 2016 (FY2016), real GDP growth
reached 4.5%, up from 4.1% in both FY2015 and FY2014.
Moody's expects such growth rates to be maintained or exceeded
in the next few years. By contrast, the median rate of growth for B-
rated sovereigns was just 2.7% in 2016.
From a macroeconomic stability perspective, the IMF program
succeeded in fostering fiscal deficit reduction, more rigorous
inflation management and the rebuilding of foreign exchange
reserves.
While further progress would be challenging, as fiscal metrics
remain weak and reserve adequacy is relatively fragile, our baseline
assumption is that the steps that the authorities have taken in the
last 3-4 years will not be reversed.
Continued government commitment to reform implementation will
help to reinforce fiscal and monetary discipline, preserving recent
macroeconomic stability gains.
Moody's expects that real GDP growth will rise towards 6% over
the next few years, as the economic benefits of the CPEC gradually
materialize and past policy reforms continue to support economic
potential.
The CPEC will increase Pakistan's competitiveness and lift
potential GDP growth by relieving supply-side constraints,
particularly in power and transport infrastructure, and by
catalyzing private sector investment.
However, security related issues and a weak track record of
public project implementation suggest the pace of project execution
will be relatively slow.
Therefore, while the CPEC would support Pakistan's credit
profile, Moody's expects the economic impact to materialize more
slowly than the government envisions, resulting in real GDP growth
closer to 5.5% over the next two years, compared to government
forecasts for 6.0% growth in FY2018, rising to 7.0% by FY2020.


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